SVB’s Row of Red Flags

Plus: New York State threatening to make Knicks fans watch games sober ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

March 13, 2023

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TOGETHER WITH

Good morning.

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Morning Brief

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Everyone should have seen the SVB collapse coming.

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MSG could become a dry venue.

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There are now more ways to fly with Saudi Arabia.

Banking

Silicon Valley Bank Imploded. Here Were the Biggest Red Flags

It’s an atypical weekend when senior FDIC officials get as much fanfare as the red – or rather champagne – carpet at the Oscars.

The Federal Government stepped in to backstop the deposits at failed Silicon Valley Bank on Sunday evening after attempts to sell off the troubled lender were unsuccessful and officials feared systemic contagion after the run on SVB last week. The FDIC began an auction process for SVB on Saturday, with final bids due Sunday afternoon but nothing materialized prompting Sunday evening’s backstop move.

The Federal Reserve and Treasury department also announced that Signature Bank had been closed by New York State regulators citing a similar systemic risk, making it clear that regulators had spent their weekend determined to prevent the contagion of SVB’s bank run, which caught them off guard at the end of last week. But should it have?

Too Big to Fail 2: 2 Big, 2 Furious

Hindsight is 20/20, and, looking back, SVB had more red flags than you’d see on a Carolina beach in October. Here were the biggest, brightest ones that everyone seemed to miss:

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Red Flag No. 1: In its most recent earnings report in January, the bank revealed its held-to-maturity securities had mark-to-market losses of nearly $16 billion in Q3, against just $11.5 billion of tangible common equity. Essentially, the bank would be underwater if it was forced to liquidate all its assets.

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Red Flag No. 2: The cause of the losses is simple — the bank took its tens of billions of customer deposits and invested heavily in bonds with sizable interest-rate risk. Worse, it was overloaded on long-duration bonds with more than 10 years to maturity, leading to a mismatch of assets and liability.

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Red Flag No. 3: As of December, roughly 95% of deposits were above the Federal Deposit Insurance Corporation’s $250K insurance limit, according to SEC filings. Make no mistake, this was a high-stakes poker game.

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Red Flag No. 4: Perhaps the risky maneuvering could have been avoided. But SVB operated without a Chief Risk Officer from April 2022 to January this year. That’s nine months… with no risk officer.

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Red Flag No. 5: SVB did employ a Chief Administrative Officer, Joseph Gentile, who had been with the company since 2007. His previous employer? Lehman Brothers. Perhaps he just found himself in the wrong place at the wrong time. Twice… in a row.

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Red Flag No. 6: CEO Greg Becker didn’t need a CRO. Just days before the bank disclosed the $1.8 billion loss that sparked the run, a trust owned by the big boss sold $3.6 million worth of SVB shares.

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Red Flag No. 7: Peter Thiel, the influential tech venture capitalist/aspiring supervillain, withdrew his Founders Fund’s entire account worth millions from the bank by at least Thursday, Bloomberg reported, and encouraged its portfolio companies to do the same.

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Red Flag No. 8: Where Thiel goes, well, so too do many tech leaders. The small, insular industry is practically by definition full of trend-chasers (these are many of the same folks who dropped everything to pursue Web 3.0, after all). In other words, it should’ve been a giant red flag that the bank’s entire clientele is hardwired to act in a way that perfectly facilitates bank runs.

Contagion containment: First Republic Bank, which has also been damaged by the fallout from SVB’s collapse, disclosed it had received a $70 billion liquidity infusion from The Fed and JPMorgan Chase, and meanwhile over in Britain, HSBC worked through the night Sunday to strike a deal with regulators to purchase SVB’s UK operation — less assets and liabilities — for £1.

– Brian Boyle

Entertainment

NY Liquor Authority Looks to Remove Madison Square Garden’s Alcohol License

If you’re going to run a creepy high-tech revenge campaign against a group of professionals, maybe don’t start with lawyers.

Last summer, Madison Square Garden Sports infamously began banning lawyers with active cases against the company from all of its venues, and now the Big Apple staple could lose its liquor license, The New York Post reported Saturday.

No Lawyers Allowed

Multiple attorneys have come forward saying they were barred from entering an MSG location — like the mom who just wanted to take her daughter’s girls scout troop to see the Radio City Christmas Spectacular or the Knicks fan who’s had season tickets for 47 years and can now only go to away games.

Picking an opposing lawyer out of a crowd of thousands is not as simple as a game of “One of these things is not like the others,” but the James Dolan-led company has something more powerful than hawk-eyed ticket takers – facial recognition software. And Dolan, who also owns Radio City Music Hall and the Beacon Theater, has been using the technology to evict his enemies, so now state agencies are coming down hard on all of his venues.

Now Dolan’s puerile targeting of patrons is being treated as a civil liberties issue:

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The New York State Liquor Authority has begun proceedings to strip MSG of its alcohol license, arguing businesses that sell booze are required to allow in the general public. Elected officials like state Sen. Liz Kreuger and Attorney General Letitia James have previously said they believe MSG’s policies may violate anti-bias laws.

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MSG retaliated, filing a petition against the SLA and calling the charges an abuse of power. In legal papers, Dolan claimed his organization was being unfairly targeted while the SLA regularly avoids charging bars and nightclubs that exclude people based on dress code, “vibe,” even gender and race.

“This gangster-like governmental organization has finally run up against an entity that won’t cower in the face of their outrageous abuses,” Dolan told The Post.

Gimme a Beer: Despite the fact MSG charges $12 for a Bud, plenty of Ranger fans, concert-goers, and those full of Christmas spirit said they’d probably not come back if they couldn’t get their drink on. “I would be 100% less likely to go,” Mike Tabz, a 27-year-old finance professional from Manhattan told the NY Post. “If they take away their liquor license, they would be targeting regular people, why would they do that?” With the Knicks being the Knicks, drinking is compulsory.

–Griffin Kelly

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Aviation

Saudi Arabia Announces New Airline and Possibly a Big Deal with Boeing

(Photo credit: Bill Wilt/Flickr)

Come fly the Saudi skies.

On Sunday, Crown Prince Mohammed bin Salman announced Saudi Arabia will launch a new state-run airline called Riyadh Air, and The Wall Street Journal reported the carrier will likely purchase a large order of Boeing jets.

Air Riyadh

The Middle Eastern nation already has another government-run airline – Saudia, which was founded in 1945 and travels to over 90 destinations across Asia, Europe, Africa, and North America. And it’s not entirely clear why it needs a second, but party on! The Saudi Arabia Public Investment Fund says the new carrier is a way to diversify the nation’s economy beyond its robust oil industry and enable “Riyadh to become a gateway to the world and a global destination for transportation, trade, and tourism.”

For months, Boeing and Airbus have been competing for a deal with the Middle Eastern nation, the WSJ reported. But now it looks like the Saudi PIF has finally made a decision:

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The PIF is expected to spend $35 billion on roughly 100 or more Boeing planes, including wide-body jets fitted for international travel. News of the deal comes shortly after Air India made the largest airplane purchase in history: 470 jets from Boeing and Airbus for roughly $85 billion.

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To make a splash, the PIF also tapped Tony Douglas, who was the CEO of the United Arab Emirate’s state-run airline for the past five years, to run Riyadh Air.

Why Can’t We Be Friends: If the deal with the US-based plane maker materializes, it’d be another signifier of easing tensions between America and Saudi Arabia. In January, the Biden administration announced they were no longer pursuing plans to retaliate against Saudi Arabia for cutting its oil production by 2 million barrels per day. Plus, the Saudis are now looking to ease tensions and reopen communications with Iran, after a round of peace talks orchestrated by China.

–Griffin Kelly

Extra Upside

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Fun guys: Oregon inches closer toward magic mushroom therapy.

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No news, eh: Meta could end news content in Canada if a new law passes.

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Regrowth.

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